A futures contract is an agreement to buy or sell an asset at a future date at an agreed-upon price. Futures contracts are standardized agreements that typically trade on an exchange. One party agrees to buy a given quantity of securities or a commodity, and take delivery on a certain date.
The futures market can be used by many kinds of financial players, including investors and speculators as well as companies that actually want to take physical delivery of the commodity or supply it.
To decide whether futures deserve a spot in your investment portfolio , consider the following:.
To illustrate how futures work, consider jet fuel:. These people are investors or speculators, who seek to make money off of price changes in the contract itself. With speculators, investors, hedgers and others buying and selling daily, there is a lively and relatively liquid market for these contracts. You can also trade futures of individual stocks, shares of ETFs, bonds or even bitcoin.
Futures: More than commodities
Some traders like trading futures because they can take a substantial position the amount invested while putting up a relatively small amount of cash. That gives them greater potential for leverage than just owning the securities directly.
How To Trade Futures For Beginners - The Basics of Futures Trading [Class 1]
Most investors think about buying an asset anticipating that its price will go up in the future. If stocks fall, he makes money on the short, balancing out his exposure to the index.
Read our guide about how to day trade. Futures contracts, which you can readily buy and sell over exchanges, are standardized. Each futures contract will typically specify all the different contract parameters:.
But borrowing money also increases risk: If markets move against you, and do so more dramatically than you expect, you could lose more than you invested.
How do futures work?
Leverage and margin rules are a lot more liberal in the futures and commodities world than they are for the securities trading world. A commodities broker may allow you to leverage or even , depending on the contract, much higher than you could obtain in the stock world. The exchange sets the rules. This volatility means that speculators need the discipline to avoid overexposing themselves to any undue risk when trading futures.
Basics of Futures Trading
Read up on everything you need to know about how to trade options. Open an account with a broker that supports the markets you want to trade.
These questions are designed to determine the amount of risk the broker will allow you to take on, in terms of margin and positions. Every broker provides varying services.
Some provide a good deal of research and advice, while others simply give you a quote and a chart.
Some sites will allow you to open up a virtual trading account. This is an invaluable way to check your understanding of the futures markets and how the markets, leverage and commissions interact with your portfolio.
Even experienced investors will often use a virtual trading account to test a new strategy. Depending on the broker, they may allow you access to their full range of analytic services in the virtual account.
Consider our best brokers for trading stocks instead.
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